November 13, 1995
Xx. Xxxx X. Xxxxxxxx
Xxx. Xxxxxxx Xxxxxxxx
Xxxxxxxx Laboratories, Inc.
000 Xxxxxxx Xxxxxx
Xxxxxxxxx, Xxxxxxxxxx 00000
Re: Purchase of Shares of Common Stock of Faroudja
Laboratories, Inc. ("FLI") and Faroudja Research
Enterprises Inc. ("FRE") (collectively, the
"Companies") by Xxxxxxx Xxxxx Holdings, Inc. (the
"Buyer") from Xxxx X. Xxxxxxxx and Xxxxxxx
Xxxxxxxx (collectively, the "Sellers")
Dear Mr. and Mrs. Xxxxxxxx:
Set forth below is our mutual agreement regarding our audit and due
diligence examination of the Companies, the terms of the purchase of shares of
common stock of the Companies, the option to purchase shares of common stock of
the Companies and certain other matters.
1. AUDIT AND DUE DILIGENCE
The Buyer shall conduct an audit and due diligence examination of
the Companies beginning as promptly as practicable after the execution and
delivery of this agreement. In that connection, the Sellers shall cause the
Companies to give the Buyer and its representatives full access during normal
business hours to the Companies' books, records, properties, employees and
professional advisors during the period (the "Audit and Due Diligence period")
beginning immediately after the execution and delivery of this agreement and
continuing until the close of business on February 9, 1996 (with a 28-day grace
period, if requested by the Sellers or the Buyer). During the Audit and Due
Diligence Period, the Sellers shall, and shall cause the Companies to, cooperate
with the Buyer and its representatives in that audit and due diligence
examination, and shall permit a firm of independent accountants selected by the
Buyer (the fees and expenses of which shall be borne by the Buyer) to audit the
financial statements of the Companies, on behalf of and for the
Mr. and Mrs. Xxxxxxxx
November 13, 1995 Page 2
benefit of the Companies, for the two years ended December 31, 1994 and the nine
months ended September 30, 1995.
2. CONFIDENTIALITY
During the Audit and Due Diligence period, the Buyer shall
maintain the confidentiality of all non-public information it receives regarding
the Companies, pursuant to the Confidentiality Agreement executed between the
Buyer and FLI on August 8, 1995 (which the parties agree shall be amended to add
FRE as a party, to be treated the same as FLI), and thereafter, prior to the
Closing, the Buyer shall afford the Sellers the opportunity to review any
offering materials the Buyer intends to furnish to prospective investors prior
to furnishing such materials; provided that Sellers assume no responsibility or
liability for such materials.
3. STOCK PURCHASE; OPTIONS; PURCHASE PRICE
(a) FRE. The Sellers agree to sell and the Buyer agrees to
purchase, for a total purchase price of $750,000 payable by Cashier's check at
the end of the Audit and Due Diligence Period ("Closing"), and "Closing Date"
being defined as the date of the Cashiers' check:
(i) 960,490 shares of common stock in FRE (which will
comprise 37.5% of the FRE common stock, without giving effect to shares which
are issuable or which may be issued pursuant to the Stock Plans); and
(ii) an option (with the shares purchasable under the option
to be held in escrow by attorneys for the Sellers on mutually agreed upon terms)
(the "FRE Options"), exercisable not later than twelve months after the Closing,
to purchase or cause to be purchased from the Sellers an additional 960,491
shares of common stock in FRE (which will comprise an additional 37.5% of the
FRE common stock, without giving effect to shares which are issuable or which
may be issued pursuant to the Stock Plans) for $750,000 payable by Xxxxxxx's
check structured to avoid the possibility of such payment being treated as a
dividend.
At the Closing, and, in the event of the exercise of the FRE Option,
upon the exercise of the FRE Option, the Sellers shall deliver to the Buyer,
free and clear of all liens, encumbrances, security interests and other adverse
claims and agreements of any kind, stock certificates representing the shares
being sold. Sellers currently own 1,964,812 shares of
Mr. and Mrs. Xxxxxxxx
November 13, 1995 Page 3
common stock and 596,496 shares of preferred stock in FRE. Prior to the
Closing, Sellers will convert each share of preferred stock into a share of
common stock. There also is outstanding a warrant issued to a consultant for
the purchase of 98,246 shares of common stock of FRE, the exercise of which will
dilute proportionately the Buyer and the Sellers.
(b) FLI. The capitalization of FLI immediately prior to the
Closing will consist of 9,800,000 shares of Common Stock, all owned by Sellers,
and a $4,000,000 demand note held by Sellers (the "Note"). In addition, stock
options to purchase up to 1,000,000 shares of common stock in FLI (which number
includes those already granted), and other mutually acceptable arrangements for
new employees ("Stock Plans"), will dilute proportionately all parties. At the
Closing and thereafter, the Stock Plans will remain in effect.
(i) XXX agrees to sell and the Buyer agrees to purchase,
for a total purchase price of $4,000,000 payable by Xxxxxxx's Check at the
Closing, an aggregate of 1,507,692 newly issued shares of Common Stock of FLI.
(ii) FLI agrees to discharge the Note in full to Sellers
immediately following the Closing.
(iii) The Sellers agree to sell and the Buyer agrees to
purchase, for a total purchase price of $7,250,000, payable by Xxxxxxx's check
at the Closing, an aggregate of 2,732,692 shares of Common Stock of FLI
currently held by the Sellers.
(iv) The 4,240,384 shares of Common Stock of FLI to be held
by Buyer following its purchases, under clauses (i) and (iii) above will
represent 37.5% of the FLI common stock, without giving effect to shares which
are issuable or which may be issued pursuant to the Stock Plans.
(v) The Sellers also agree to grant to Buyer an option
(with the shares purchasable under the option to be held in escrow by attorneys
for the Sellers on mutually agreed upon terms) (the "FLI Option"), exercisable
not later than twelve months after the Closing, to purchase or cause to be
purchased from the Sellers an additional 4,240,385 shares of common stock in FLI
(which will comprise an additional 37.5% of the FLI common stock without giving
effect to shares which are issuable or which may be issued pursuant to the Stock
Plans) for $11,250,000 payable by Cashier's check structured to avoid the
possibility of such payment being treated as a dividend.
Mr. and Mrs. Xxxxxxxx
November 13, 1995 Page 4
At the Closing, and, in the event of the exercise of the FLI Option,
upon the exercise of the FLI Option, the Sellers shall deliver to the Buyer,
free and clear of all liens, encumbrances, security interest and other adverse
claims and agreements of any kind, stock certificates representing the shares
being sold.
(c) The FRE Option and the FLI Option are only exercisable
together and in full, on an all or nothing basis.
(d) The parties agree to cooperate in structuring the payment
terms in the most tax advantageous manner for the Sellers, provided that such
does not significantly alter the assets or liabilities of the Companies.
4. CONDITIONS
The Closing is subject to the following conditions: The Buyer
must be satisfied in its sole discretion from its review of the completed audit
and its due diligence examination that there are not material adjustments to be
made to the balance sheets or the income statements of the Companies (as
presented by the Seller), that there are not material adverse facts about the
Companies or their businesses or prospects, the Buyer has obtained financing
satisfactory to it to close, and the Buyer is satisfied that no material adverse
changes in the Companies' operations or prospects have occurred or can
reasonably be foreseen.
5. DUTIES AND OBLIGATIONS OF SELLERS
During the Audit and Due Diligence Period, and thereafter
following the Closing until the earlier of the expiration or exercise of the
Option referred to in paragraph 3 above, the Seller shall ensure that the
Companies comply with the following provisions (any of which may be waived with
the prior written consent of the Buyer):
(a) The Companies shall operate their businesses in the ordinary
course.
(b) The Sellers shall promptly notify the Buyer of, and furnish
it any information it may reasonably request with respect to the occurrence or
existence of, any event or facts that could reasonably be expected to result in
a material adverse change in the Companies' businesses or prospects.
Mr. and Mrs. Xxxxxxxx
November 13, 1995 Page 5
(c) Other than in the ordinary course of business and consistent
with past practice, the Companies will not grant or agree to grant any bonus to
any current employee, any general increase in the rates of salaries or
compensation of its current employees or any specific increase to any current
employee, or provide for any new employment benefits to any of its current
employees or any increase in any existing benefits without the prior written
consent of the Buyer and such consent shall not be unreasonably withheld. The
foregoing shall not restrict use of the Stock Plans by the Companies.
(d) The Companies will not declare, set aside or pay any
dividends or other distributions in respect of their capital stock or their
securities, redeem, purchase or otherwise acquire any of their capital stock or
their securities, issue sell or encumber any shares of their capital stock or
other securities (except pursuant to the Stock Plans or as contemplated in
paragraph 3), enter into any merger or consolidation agreement or change their
authorized capital stock.
(e) The Companies will not sell, assign, voluntarily encumber,
grant a security interest in or license with respect to, or dispose of, any of
their assets or properties, tangible or intangible, or agree to incur any
liabilities, except for sales and dispositions made or liabilities incurred in
the ordinary course of their businesses.
6. OTHER MATTERS
It is understood that additional management of the Companies will
be recruited by the Buyer, subject to the Sellers' approval, including a
Marketing Manager and eventually a CEO, to ensure that Xxxxxxx and Xxxx may be
able to spend no less than 1/4 and 1/2 of their time, respectively, during 1996
and 1/8 and 1/3 of their time, respectively, during 1997 working in the
Companies' interest either at the Sunnyvale facility or from an office to be
established abroad. Sales and research efforts will be carried out by the
Sellers from an office to be established in France once the Sellers are
comfortable with the additional management team.
Compensation for Xxxx' and Xxxxxxx'x services will be as follows:
1996: Yves $100,000
Xxxxxxx $ 18,750
1997: Yves $ 66,600
Xxxxxxx $ 10,000
Mr. and Mrs. Xxxxxxxx
November 13, 1995 Page 6
In addition, two company cars will be at Yves' and Xxxxxxx'x
disposal for the duration of the employment period, which shall be sold to the
Faroudja family at blue book value at the end of the employment period. The
medical and dental group insurance will cover the Faroudja family during that
period and Xxxx and Xxxxxxx will be entitled to continue to participate in other
employee benefits.
In the event the Buyer does not exercise the Option and a new
buyer offers to purchase all or part of the Sellers' remaining capital stock in
the Companies, the Buyer shall have the right to "tag along" on a pro rata basis
with respect to such sale. Furthermore, in the event the Buyer receives any
offer to sell all or part of its capital stock in the Companies, the Sellers
shall have a similar right to "tag along" on a pro rata basis with respect to
any such sale.
It is agreed that royalties being received by the Sellers for
license agreements signed prior to December 31, 1990 and relating to inventions
by the Sellers are not assets of the Companies. The license agreements
underlying these royalties shall be enumerated in the Closing documents. The
Companies will have a royalty-free license with respect to those inventions and
all future inventions made by the Sellers prior to December 31, 1997 relevant to
the Companies' businesses. In addition, the Companies shall have a right of
first refusal to license or otherwise use and acquire inventions by the Sellers
which are relevant to the Companies' businesses and that arise within 5 years of
the Closing. A renewable year-to-year Consulting Agreement containing a right
of first offer concerning future inventions by the Seller and an appropriate
consultant fee will be negotiated.
The Buyer shall use all reasonable efforts to effect a registered
public offering of the Companies' stock.
7. OTHER TRANSACTIONS
During the Audit and Due Diligence Period, and thereafter
following the Closing until the earlier of the expiration or exercise of the
Option, the Sellers shall not, and shall not authorize or permit any of their
representatives or agents or representatives or agents of the Companies to,
directly or indirectly, (a) initiate contact with any other person or entity in
an effort to solicit any financing, acquisition or similar transaction with
respect to the Companies, (b) cooperate with, or furnish or cause to be
furnished any non-public information concerning the Companies to any other
person or entity in connection with any financing, acquisition or similar
transaction with respect to the Companies, (c) negotiate with any other person
or entity with respect to any financing, acquisition or similar transaction
Mr. and Mrs. Xxxxxxxx
November 13, 1995 Page 7
with respect to the Companies or (d) enter into any agreement or understanding
with the intent to effect any financing, acquisition or similar transaction with
respect to the Companies. The Sellers shall immediately give written notice to
the Buyer of the details of any such proposed transaction by any other person or
entity of which they become aware.
8. BOARD OF DIRECTORS
At the Closing, the Sellers shall cause Xxxxx Xxxxxxxxx to be
elected to the board of directors of each of the Companies. Following the
Option exercise, the Buyer shall take all necessary action to cause Xxxx
Xxxxxxxx to continue to be a director of each of the Companies. The preceding
sentences shall remain in effect until the tenth anniversary of the Closing as
long as the Buyer and the Sellers continue to own shares in the Companies
sufficient to effect the foregoing sentences.
9. FURTHER ASSURANCES
The Buyer and Sellers shall take such further action, and execute
and deliver such further documents, as either party may reasonably request to
carry out the specific purposes of the agreement.
10. TERMINATION
If the Closing does not occur by February 9, 1996 (or within the
28-day grace period referred to in paragraph 1), unless such date is mutually
extended in writing by the Buyer and the Sellers, this agreement and all rights
and obligations (other than pursuant to paragraph 2) shall terminate (but no
such termination shall relieve a party of liability for any breach prior to
termination).
11. ASSIGNMENT
This agreement and the rights and obligations hereunder may not
be assigned or transferred in any manner, except that the Buyer may assign this
agreement to an affiliated company controlled by the Buyer, which shall be bound
by all of the terms of this agreement (but no such assignment shall relieve the
Buyer of its liability and obligations under this agreement).
Mr. and Mrs. Xxxxxxxx
November 13, 1995 Page 8
12. GENERAL
(a) With respect to compliance with the Securities Act of
1933, as amended (the "Act"), the Buyer represents that the shares of the
Companies at the Closing and Option exercise will be acquired by the Buyer in
compliance with the Act and without any intention of reselling or
distributing any of such shares, except in accordance with the provisions of
the Act and the applicable rules and regulations promulgated thereunder.
(b) This agreement constitute the full and entire understanding
and agreement between the parties with respect to the subject hereof. This
agreement and any term may only be amended or waived by a written instrument
signed by all parties.
(c) This agreement shall be governed by and interpreted in
accordance with the laws of the State of California.
(d) All notices permitted or required under this agreement shall
be in writing and shall be delivered in person, or, if mailed, by first class,
registered or certified mail, postage pre-paid, or sent by courier, to the
address of the party specified at the beginning or end of this agreement or such
other address as a party may specify in writing.
If the foregoing accurately reflects our mutual agreement, please
indicate by signing below.
Executed this 16 day of November, 1995.
THE BUYER:
XXXXXXX XXXXX HOLDINGS, INC.
By: /s/ Xxxxx X. Xxxxxxxxx
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Xxxxx X. Xxxxxxxxx
Mr. and Mrs. Xxxxxxxx
November 13, 1995 Page 9
Executed this 16 day of November, 1995.
THE SELLERS:
/s/ Xxxx X. Xxxxxxxx
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/s/ Xxxxxxx Xxxxxxxx
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